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					                United States Government Accountability Office

GAO             Report to Congressional Requesters




November 2011
                FEDERAL
                EMPLOYEES’ GROUP
                LIFE INSURANCE

                Retirement Benefit
                and Retained Asset
                Account Disclosures
                Could Be Improved




GAO-12-94
                                              November 2011

                                              FEDERAL EMPLOYEES’ GROUP LIFE
                                              INSURANCE
                                              Retirement Benefit and Retained Asset Account
Highlights of GAO-12-94, a report to
                                              Disclosures Could Be Improved
congressional requesters




Why GAO Did This Study                        What GAO Found
The Federal Employees’ Group Life             OPM, by directing the funding of the Employees’ Life Insurance Fund, has effectively
Insurance program (FEGLI),                    allowed the FEGLI program to assume the risk of loss, while MetLife provides
administered by the Office of                 administrative services for the program. FEGLI has some insurance coverage
Personnel Management (OPM),                   features that most private sector group life plans do not, but a lack of disclosure in
insures over 4 million federal                certain areas may make it difficult for employees to make fully informed decisions
employees and annuitants in the event         about buying coverage. Generally with private group plans the employer pays the full
of an enrollee’s death. As a result, it is    premium for a set amount of basic coverage, but the statute that created FEGLI
important that the program is clearly         requires that enrolled employees contribute two-thirds of the premium for Basic
explained and properly overseen.
                                              coverage. In addition, FEGLI premiums include the cost of a portion of retirement
However, some aspects of FEGLI,
                                              coverage, a feature generally not found in private sector alternatives, and which can
such as program disclosures and the
use of retained asset accounts
                                              make FEGLI coverage more costly than those alternatives. Further, for Basic
(RAA)—financial accounts used to              coverage, FEGLI premiums are level over employees’ working lives, so that early on
settle life insurance claims—have             premiums may be higher than the actual cost of coverage, while later they may be
raised questions about the program’s          lower. This feature can make FEGLI coverage appear to be more costly than private
operations.                                   individual plans for certain employees. However, the materials that FEGLI provides
                                              to employees do not disclose either the retirement coverage costs or the level
GAO was asked to describe and                 premiums. Employees, particularly those who might leave government service or
evaluate (1) the FEGLI program’s              stop participating in FEGLI before realizing the benefits of these features, may find
structure and operations, (2) OPM’s
                                              such disclosures important when deciding whether to purchase the insurance.
administration and oversight of the
program, and (3) the use of RAAs in           OPM oversees FEGLI’s provision of life insurance, but certain processes for
FEGLI claims payments. To address             reviewing program benefits and premiums could be improved. OPM administers
these objectives, GAO reviewed FEGLI          basic FEGLI functions such as determining and collecting premiums, publishing
law and regulations, interviewed OPM,         program regulations, and overseeing the claims payment processes of MetLife, the
Metropolitan Life Insurance Company           insurer contracted to provide claims services. Because the program was intended to
(MetLife), and state insurance officials,     provide a low-cost benefit to federal employees, OPM has periodically conducted
and met with insurance industry               informal comparisons of FEGLI costs and benefits to those of private group life plans.
experts.                                      In addition, to better ensure that the program charges appropriate premium rates,
                                              OPM actuaries conduct annual reviews and may recommend rate changes.
What GAO Recommends                           However, OPM does not have documented processes for conducting its
GAO recommends that OPM (1)                   comparisons or for documenting any recommended rate changes. The lack of
improve disclosures on important              documented processes in both areas creates a risk that FEGLI benefits may not be
FEGLI features, (2) develop and               meeting the needs of federal employees and could be priced at inappropriate rates.
implement a more structured process           From the mid 1990s until early 2011, RAAs were the default settlement option for
for reviewing the FEGLI program and           many FEGLI beneficiaries. While RAAs offer some benefits to FEGLI beneficiaries,
premium rates, and document review
                                              OPM does not provide beneficiaries with some important information on RAA
outcomes, and (3) improve disclosures
                                              operations and protections. According to OPM and some industry officials, RAAs can
on RAA protections and regulation.
OPM concurred with these                      reduce administrative costs, provide guaranteed interest rates, and allow
recommendations.                              beneficiaries time to decide how to use settlement funds. But other industry
                                              participants and a federal regulator said that beneficiaries might not be fully aware of
                                              their settlement options or that RAAs are not insured by the Federal Deposit
                                              Insurance Corporation. OPM has recently improved FEGLI disclosures for RAAs,
                                              and RAAs are no longer the default settlement option. However, the disclosures still
                                              lack information on how the accounts are established and regulated, and how certain
                                              protections differ across states. Without this information, beneficiaries may not be
View GAO-12-94 for key components.
For more information, contact Alicia Puente   able to make fully informed decisions when choosing a settlement option for their
Cackley at (202) 512-7022 or                  FEGLI claims payment.
cackleya@gao.gov.
                                                                                         United States Government Accountability Office
Contents


Letter                                                                               1
               Background                                                            3
               Although Similar to Private Sector Plans, FEGLI Has Distinct
                  Employee Benefits and Costs That Are Not Clearly Disclosed        10
               In Overseeing FEGLI, Processes for Setting Premium Rates Could
                  Be Improved                                                       16
               RAAs Are No Longer the Default Settlement Option, but Better
                  Disclosures Are Needed                                            24
               Conclusions                                                          33
               Recommendations for Executive Action                                 35
               Agency Comments and Our Evaluation                                   35

Appendix I     Scope and Methodology                                                37



Appendix II    Federal Employees’ Group Life Insurance Program
               Financial Information                                                40



Appendix III   Comments from the Office of Personnel Management                     41



Appendix IV    GAO Contact and Staff Acknowledgments                                43



Figures
               Figure 1: Example of a Sample FEGLI RAA Draft                        10
               Figure 2: FEGLI Funds and Operations                                 17
               Figure 3: FEGLI Assets and Liabilities, 2000-2010                    21
               Figure 4: State Regulation of RAAs, as of August 2011                29
               Figure 5: FEGLI Premiums, Claims Paid, and Interest Income,
                        2000-2010                                                   40




               Page i                                                   GAO-12-94 FEGLI
Abbreviations
ACLI           American Council of Life Insurers
AD&D           accidental death and dismemberment
CSRS           Civil Service Retirement System
FEGLI          Federal Employees’ Group Life Insurance
FERS           Federal Employees Retirement System
FDIC           Federal Deposit Insurance Corporation
LIFAR          Life Insurance Federal Acquisition Regulation
MetLife        Metropolitan Life Insurance Company
NAIC           National Association of Insurance Commissioners
NCOIL          National Conference of Insurance Legislators
OFEGLI         Office of Federal Employees’ Group Life Insurance
OPM            Office of Personnel Management
RAA            retained asset account
SFFAS          Statement of Federal Financial Accounting Standards


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Page ii                                                                  GAO-12-94 FEGLI
United States Government Accountability Office
Washington, DC 20548




                                   November 10, 2011

                                   The Honorable Elijah E. Cummings
                                   Ranking Member
                                   Committee on Oversight and Government Reform
                                   House of Representatives

                                   The Honorable Edolphus Towns
                                   Ranking Member
                                   Subcommittee on Government Organization, Efficiency
                                     and Financial Management
                                   Committee on Oversight and Government Reform
                                   House of Representatives

                                   Life insurance is an important purchase for many Americans because it
                                   provides income replacement and financial protection to beneficiaries if
                                   they lose loved ones. While many Americans obtain life insurance by
                                   purchasing individual policies in the private market, many also obtain
                                   such coverage through employer-sponsored group plans, including the
                                   approximately 4 million federal employees and annuitants who purchase
                                   life insurance through the Federal Employees’ Group Life Insurance
                                   program (FEGLI). This program, administered by the Office of Personnel
                                   Management (OPM), involves substantial federal resources. In fiscal year
                                   2010, the total amount of FEGLI life insurance coverage in force was
                                   $824 billion, and the balance in the plan’s financial fund—the Employees’
                                   Life Insurance Fund (FEGLI Fund)—totaled approximately $38 billion. 1 In
                                   addition, throughout 2010, FEGLI paid out approximately $2.6 billion in
                                   insurance claims to beneficiaries of federal employees. The program also
                                   involves substantial premium costs to enrolled federal employees, who
                                   pay two-thirds of the premium for an initial amount of Basic life insurance
                                   and the entire premium for any Optional insurance. 2 As a result, ensuring
                                   that FEGLI is properly administered, with appropriately priced policies,



                                   1
                                    This is the fund OPM uses for the FEGLI program to pay for life insurance settlements,
                                   administrative costs, and compensation to MetLife for adjudicating and paying FEGLI
                                   claims.
                                   2
                                    For the purposes of this report, “Basic” coverage refers to FEGLI coverage while “basic”
                                   refers to life insurance offered in the private sector. We treat FEGLI’s “Option A, B, and C”
                                   and the private sector’s “optional” coverage similarly.




                                   Page 1                                                                     GAO-12-94 FEGLI
and that federal employees receive enough information to make an
informed decision about participating in the program, is important.

The processes and methods for paying FEGLI life insurance claims
determine how beneficiaries of federal employees receive insurance
settlement funds. For the first several decades of the program,
beneficiaries received settlement funds through a lump-sum check. In
1994, FEGLI began offering retained asset accounts (RAA) to
beneficiaries as the default settlement option where the proceeds payable
were $7,500 or more. With RAAs, the Metropolitan Life Insurance
Company (MetLife)—the life insurer under contract with OPM for the
FEGLI program since its creation by Congress in 1954—makes claims
payments by establishing guaranteed accounts in beneficiaries’ names,
manages the assets backing RAA liabilities created by these accounts,
determines how to invest RAA funds, guarantees a minimum interest rate
to be credited to retained funds, and administers the accounts that allow
beneficiaries to access funds as they choose. While some industry
participants point to the potential benefits that RAAs provide, other
participants have raised questions about these accounts. For FEGLI,
these questions have included whether policyholders fully understand
their settlement options and their associated costs, benefits, and
protections. 3

This report responds to your interest in how FEGLI operates and how it
uses RAAs. The report describes and evaluates

   how FEGLI is structured and operated,

   OPM’s administration and oversight of FEGLI, and

   FEGLI’s use of RAAs to pay claims.

To describe and evaluate FEGLI’s key operations, we examined the
program’s authorizing statute and associated regulations and reviewed its
key policy documents, including the contract between OPM and MetLife.
In addition, we compared FEGLI’s coverage and practices with those of
several large private sector group life insurers. To describe and evaluate


3
 In this report, we use the term “industry participants” to refer to those entities with a role
in the insurance industry, including state insurance regulators and benefit administrators,
actuaries, consumer advocates, and insurance industry associations.




Page 2                                                                        GAO-12-94 FEGLI
             OPM’s administration and oversight of the FEGLI program, we reviewed
             applicable federal and state laws, regulations, policy guidance, and
             materials from consumer advocates, and examined OPM’s monitoring,
             reporting, and other oversight activities. We also interviewed OPM and
             MetLife officials and reviewed FEGLI annual financial and performance
             reports to understand how FEGLI operates financially and to determine its
             assets and liabilities. In addition, we reviewed the federal budget for
             information on FEGLI’s claims, assets, and liabilities. We found FEGLI
             program information and data from OPM and MetLife to be reliable for the
             purposes of this report. To identify any FEGLI regulatory or consumer
             protection issues, we met with industry association representatives, a
             consumer advocate, and other experts. To describe and evaluate the role
             of RAAs in FEGLI’s settlement process, we examined key OPM and
             MetLife policy documents and program guidance and interviewed OPM
             management officials. We focused on how RAAs function, what kinds of
             RAA disclosures FEGLI participants receive, and what RAA protections
             are available to FEGLI beneficiaries. 4 In addition, we examined how
             RAAs are regulated by focusing on the activities and processes OPM and
             state regulators use to oversee these accounts. In particular, we
             interviewed insurance regulators from California, Florida, New York, North
             Carolina, and Maryland to determine their methods for overseeing RAAs.
             We selected this sample of states because it is geographically diverse,
             has a large number of federal employees, and contains some states that
             have RAA-specific regulations and others that do not. For a more detailed
             description of our scope and methodology, see appendix I.

             We conducted this performance audit from September 2010 to November
             2011 in accordance with generally accepted government auditing
             standards. Those standards require that we plan and perform the audit to
             obtain sufficient, appropriate evidence to provide a reasonable basis for
             our findings and conclusions based on our audit objectives. We believe
             that the evidence obtained provides a reasonable basis for our findings
             and conclusions based on our audit objectives.


             Established by Congress in the Federal Employees’ Group Life Insurance
Background   Act of 1954 5 as a benefit to federal employees and their families and


             4
              For the purposes of this report we use the term disclosures to include the FEGLI
             Handbook, Employee Program Booklet, website, and life insurance claim form.
             5
             Pub L. No. 83-598. 68 Stat. 736 (Aug 17, 1954).




             Page 3                                                                  GAO-12-94 FEGLI
                           administered by OPM, FEGLI offers federal employees the opportunity to
                           choose from a range of group term life insurance coverage options. 6
                           FEGLI insurance is provided through a contract OPM has established
                           with MetLife. MetLife’s Office of Federal Employees’ Group Life Insurance
                           (OFEGLI) adjudicates claims under the FEGLI program and makes
                           payments to FEGLI beneficiaries. 7


FEGLI Insurance Coverage   Most federal employees, including part-time employees, are eligible for
and Costs                  insurance under FEGLI, and approximately 85 percent purchase FEGLI
                           coverage. Upon starting their federal employment, federal employees are
                           automatically enrolled in FEGLI’s Basic life insurance coverage unless
                           they file appropriate paperwork with their employing agency to opt out of
                           the program. Basic life insurance coverage equals a federal employee’s
                           annual salary rounded up to the next even thousand plus two thousand




                           6
                            In addition to FEGLI, the Civil Service Retirement System (CSRS) and Federal
                           Employees Retirement System (FERS) provide survivor benefits under certain conditions
                           to current and former spouses and children in the event a federal employee dies. Under
                           CSRS, survivors may receive 55 percent of the accrued disability annuity for which the
                           employee would have been eligible. Under FERS, survivors of employees who had at
                           least 18 months of service may receive a lump-sum payment (a fixed amount that is
                           adjusted each year for inflation), plus the greater of half of the employee’s high-3 average
                           pay or half of the employee’s annual rate of pay at death. According to OPM, high-3
                           average pay is determined by finding the highest average basic pay over any 3-year
                           period. The 3 years must be consecutive. Generally, the final 3 years of service include
                           the highest pay, but pay from an earlier period can be used if it was higher. In addition to
                           this lump-sum payment, FERS survivors of employees who had at least 10 years of
                           service may receive an annuity equal to 50 percent of the employee’s accrued benefit.
                           Under both CSRS and FERS, there are also benefits payable to survivors of former
                           employees and to survivors of retirees.
                           7
                            Group life insurance protects a group of people and is usually issued to an employer for
                           the benefit of its employees. Each group member holds a certificate as evidence of his or
                           her insurance. Group life insurance generally does not require individuals to demonstrate
                           medical proof of insurability and may be less expensive than individual policies that
                           require medical underwriting, depending on the health of the individual. Term insurance is
                           generally defined as covering the insured for a certain period of time (the “term”). Term
                           policies provide death benefits only if the insured dies during the term, which can be 1, 5,
                           10, or even 30 years, with group life policies generally having a term of 1 year. Term
                           policies generally do not have any cash, or paid-up value, and those with term policies
                           cannot get loans by borrowing from this insurance.




                           Page 4                                                                     GAO-12-94 FEGLI
dollars, or $10,000, whichever is higher. 8 Basic insurance also provides
an extra benefit to employees under age 45, at no additional cost. This
extra benefit doubles the amount of Basic insurance payable if the
employee dies at age 35 or younger. The extra benefit decreases 10
percent each year until there is no extra benefit at age 45 and above. For
Basic coverage, employees pay two-thirds of the premium determined by
OPM, and the employing agencies pay the remaining third. 9 The rate all
covered employees, regardless of age, pay for each $1,000 of Basic
insurance is $0.150 bi-weekly or $0.325 monthly. FEGLI also provides
accidental death and dismemberment (AD&D) insurance as part of its
Basic insurance at no additional cost. 10 AD&D insurance protects
employees in the event of a fatal accident or an accident which results in
the loss of a limb or eyesight. For benefits to be paid, the death or loss
must occur no later than 1 year from the date of the accident and must be
a result of bodily injury sustained from that accident.

Federal employees may also choose to purchase three types of Optional
insurance in addition to Basic coverage—Options A, B, and C—by
submitting a Life Insurance Election Form (SF 2817) within 60 days of
beginning their employment to their human resources office. 11

     Option A offers $10,000 of life insurance coverage. Premiums for
      Option A coverage vary by age groups, as determined by OPM.
      These groups start with employees “under age 35,” progress in 5-year
      increments until age 59, and finish with a “60 and over” group. Bi-
      weekly and monthly costs for Option A coverage range from $0.30




8
 These premium amounts, as well as many aspects of the FEGLI program, including for
example, the percentage of the premium paid by each employee, the amount of coverage
for accidental death and dismemberment (AD&D) coverage, and the existence and
amount of optional insurance coverage, are mandated by the FEGLI statute. See 5 U.S.C.
§§ 8701-8716.
9
 According to OPM, the United States Postal Service pays the entire cost of FEGLI Basic
insurance for its employees.
10
    AD&D insurance is also included in Option A insurance coverage at no additional cost.
11
  In addition, federal employees can elect Basic and Options A, B, and C within 60 days of
experiencing a qualifying life event. Qualifying life events include marriage, divorce, the
death of a spouse, or acquisition of an eligible child.




Page 5                                                                   GAO-12-94 FEGLI
     and $0.65, respectively, for the “under age 35” group to $6.00 and
     $13.00, respectively, for the “60 and over” age group. 12

    Option B offers additional Optional insurance coverage in an amount
     of one to five multiples of the employee’s annual salary, after rounding
     the salary up to the next even thousand. For Option B coverage, age
     group designations also apply but begin with “under age 35,” continue
     in 5-year age increments until age 79, and end with an “80 and over”
     age group. Bi-weekly and monthly costs for each $1,000 in insurance
     can range from a low of $0.03 and $0.065, respectively, for
     employees under 35 to a high of $2.40 and $5.20, respectively, for
     employees 80 and older.

    Option C covers eligible family members of an employee or retiree,
     including the enrollee’s spouse and eligible dependent children. The
     employee selects one to five times an amount (a “multiple”)—$5,000
     for a spouse and $2,500 for each eligible dependent child. If
     employees purchase optional coverage within the 60 days, no medical
     underwriting is necessary. For Option C coverage, the age group
     designations are the same as for Option B, and costs range from bi-
     weekly and monthly amounts of $0.27 and $0.59, respectively, per
     multiple for those under 35 to $6.00 and $13.00, respectively, per
     multiple for those 80 and older.

When federal employees retire, FEGLI also offers Basic and Optional life
insurance, and employees are able to choose among several retirement
coverage levels after age 65. For Basic insurance in retirement,
employees must choose whether to reduce their postretirement insurance
level by 75 percent, 50 percent, or maintain full coverage. Those
choosing the 75 percent reduction pay no premiums after reaching age
65. Those choosing the 50 percent reduction or full coverage option
continue to pay premiums in amounts determined by OPM; the
postretirement premium rates are greater than preretirement rates. When
the 75 percent reduction in coverage is selected, OPM reduces the
coverage level by 2 percent per month beginning at age 65, until 25
percent of the original coverage remains. If the 50 percent reduction is
selected, the coverage level reduces by 1 percent per month beginning at




12
  These premium rates are for the full $10,000 of Option A coverage, not per $1,000 of
coverage as the rates for Basic and Option B coverage are quoted.




Page 6                                                                  GAO-12-94 FEGLI
age 65, until 50 percent of the original coverage remains. If no reduction
is selected, the coverage does not reduce.

Federal employees may also choose to continue Optional coverage into
retirement and FEGLI offers several choices. Option A coverage reduces
2 percent per month beginning at age 65, to 25 percent of the
preretirement amount, and no premiums are charged in retirement after
the retiree reaches age 65. For Options B and C, employees desiring
coverage must elect to continue one to five multiples of coverage into
retirement, and elect whether to have all of those multiples retain full
coverage or reduce by 100 percent, at a rate of 2 percent per month for
50 months, beginning at age 65. For the 100 percent reduction option,
once the reduction starts, retirees do not pay premiums after reaching
age 65. For the full coverage option, retirees continue to pay the full
premium, as determined by OPM for the retiree’s specific age group. 13

The following provides an example of FEGLI premiums for a 48-year old
federal employee, married with three children, and earning $88,300 per
year.

    According to OPM, Basic insurance would cost $13.65 bi-weekly and
     $354.90 annually. 14

    If the employee seeks to maximize Option B coverage by purchasing
     five times annual pay, Option B coverage would cost $40.05 bi-weekly
     and $1,041.30 annually. 15

    In this example, the employee purchases Basic and Optional life
     insurance coverage totaling $536,000, at an annual cost of $1,396.20.




13
  For Option B coverage, these rates can range from $.065 per month for each $1,000 of
coverage for those under age 35 to $5.20 per month for those 80 years of age and older.
For Option C coverage, these rates can range from $.59 per month for each multiple of
coverage selected for those under age 35 to $13.00 per month for those 80 years and
older.
14
  For Basic insurance, the employee’s salary would be rounded up to $91,000. Basic
insurance cost would be 91 x $0.150, or $13.65 biweekly and $354.90 annually.
15
  For Option B insurance, the salary would be rounded to $89,000 x 5 multiples of annual
salary, or $445,000 in coverage. Option B insurance cost would be 445 x $0.09, or $40.05
biweekly and $1,041.30 annually.




Page 7                                                                 GAO-12-94 FEGLI
                            If this employee continues full Basic and Option B coverage after
                            retirement, by choosing the No Reduction option for both, and retires at
                            the age of 65 (assuming the same $88,300 salary), Basic insurance
                            would cost $1,998.36 annually and Option B coverage would cost
                            $8,330.40 annually. 16 The total amount of Basic and Optional insurance
                            for the employee at the time they retire would be $536,000 at an annual
                            cost to the employee of approximately $10,300.


Adding or Adjusting FEGLI   Federal employees may add or adjust FEGLI coverage when life events
Coverage                    such as marriage, divorce, death of a spouse, or the acquisition of an
                            eligible child occurs. Federal employees may also add or adjust coverage
                            when OPM offers open seasons, although OPM officials noted that these
                            periods are rare. 17 FEGLI most recently offered open seasons in 1999
                            and 2004. Employees who opted out of FEGLI coverage upon starting
                            federal employment may also add coverage during these times.
                            Additionally, if at least a year has passed since an employee opted out of
                            FEGLI, an employee may request FEGLI coverage by providing medical
                            information via a form partially completed by the employee’s physician.
                            Employees are responsible for any associated expenses such as a
                            physician’s fee. In addition, certain employees of the Department of
                            Defense are eligible to elect FEGLI coverage without experiencing a
                            qualifying life event or by providing medical information.


Payment of FEGLI            When a federal enrollee with FEGLI coverage dies, MetLife’s OFEGLI
Benefits                    pays claims to the federal enrollee’s designated beneficiary. If no
                            beneficiary has been designated, payments will be made roughly in the
                            following order pursuant to statute: to the enrollee’s surviving spouse; if
                            none, to the child or children in equal shares; if none, to surviving parents


                            16
                              This example assumes that the employee retires at age 65, is an annuitant, and
                            chooses the No Reduction option for Basic insurance and five multiples of Option B
                            coverage. The preretirement premium for Basic insurance stops at age 65, but the
                            employee pays an extra premium for the Basic Insurance No Reduction option. The rate
                            for Basic insurance with No Reduction option is $1.83 per $1,000 of coverage per month
                            for an annual total cost of $1,998.36. Having chosen the No Reduction option for five
                            multiples of Option B coverage in retirement at age 65 would cost the employee $8,330.40
                            annually (445 x $1.560 x 12 months).
                            17
                              An open season is a time designated by OPM during which federal employees can
                            assess their benefits and potentially change their benefits enrollment without undergoing a
                            medical examination or qualifying life event.




                            Page 8                                                                   GAO-12-94 FEGLI
in equal shares; if none, to the executor or administrator of the
employee’s estate; or, if none, to the enrollee’s next of kin as determined
by applicable state laws. The enrollee’s beneficiary or other survivor must
follow a prescribed process for filing a claim and receiving payment that
begins with contacting the human resources office at the insured’s
agency to report the death, submitting a certified death certificate, and
submitting a Claim for Death Benefits form.

According to FEGLI materials, beneficiaries may choose a payout by
receiving a lump- sum check or an RAA. According to the American
Council of Life Insurers (ACLI), RAAs have existed since 1982, and many
insurers provide them for both group and individual life insurance policies.
When an insured person dies, the life insurance company that issued the
policy may place the death benefit proceeds into an RAA, which accrues
interest for the beneficiaries from the day the account is established for as
long as the funds remain in the account. Beneficiaries have full and
immediate access to their funds and can withdraw some or all of the funds
at any time without penalty. In addition, MetLife pays RAA accountholders
a minimum guaranteed interest rate that typically is calculated using one of
several market rate indexes. 18 MetLife compounds interest on RAAs daily
and credits that interest monthly. MetLife issues a book of drafts to the
beneficiary, allowing immediate access to the funds without penalty.
Beneficiaries may then use them to meet various financial needs, for
example to pay bills, make retail purchases (fig. 1), or transfer funds from
the RAA to another account, such as a savings or checking account. 19
FEGLI beneficiaries, like other life insurance beneficiaries, may leave funds
in their RAA for as long as they wish or withdraw the entire amount at any
time, and there are no maintenance fees associated with these accounts.
By investing the assets backing the liabilities of RAAs funded with FEGLI
claims payments, MetLife may earn a profit in the form of a spread, or the
difference between the interest it pays beneficiaries and what it earns on
invested assets backing RAA liabilities less expenses. MetLife assumes
the investment risk associated with investing these assets.



18
  MetLife sets RAA interest rates by referencing two indexes: the iMoneyNet Money Fund
Report Averages/Government 7-Day Simple Yield (a leading index of government money
market mutual fund rates) and the Bank Rate Monitor National Money Market Rate Index (a
leading index of rates paid by the 100 large banks and thrifts on money market accounts).
19
  A draft is a payment order in writing that directs a second party—in the case of RAAs,
the insurance company—to pay a specified sum to a third party, for example, a retailer. A
check is a bank draft that is payable when presented.




Page 9                                                                  GAO-12-94 FEGLI
                              Figure 1: Example of a Sample FEGLI RAA Draft




                              Source: MetLife.




Although Similar to
Private Sector Plans,
FEGLI Has Distinct
Employee Benefits
and Costs That Are
Not Clearly Disclosed

Some FEGLI Features Are       FEGLI’s Basic life insurance coverage shares several similarities with the
Similar to Those of Private   coverage offered by private sector group plans. First, both FEGLI and most
Sector Group Life             private sector plans automatically enroll employees in basic coverage,
                              often including AD&D coverage, unless they opt out of the program, and
Insurance                     both provide options for employees who opted out of the program to join
                              later. 20 Second, neither FEGLI nor private sector basic insurance initially
                              requires employees to provide information on their medical condition or



                              20
                                For FEGLI, Basic coverage equals an employee’s salary amount rounded up to the next
                              even thousand, plus two thousand dollars, or $10,000, whichever is higher. According to
                              industry officials, for private plans basic coverage typically can be a flat dollar amount, the
                              amount of an employee’s salary, or up to two times an employee’s salary.




                              Page 10                                                                      GAO-12-94 FEGLI
                             history. 21 That is, any employee can enroll in the program regardless of
                             age or state of health at the time that the employee is first eligible to join.
                             Third, while some private sector plans offer a flat amount of basic
                             insurance ranging from $5,000 to as much $50,000, many offer coverage in
                             an amount equal to the employee’s salary or a multiple of it, as FEGLI
                             does. Finally, FEGLI and private sector programs both typically use a
                             composite rate structure to price their basic group life benefits; that is, a
                             rate structure where all employees pay the same average rate regardless
                             of age or health status. The effect of a composite rate is that all employees
                             pay the same rate per $1,000 of insurance coverage regardless of
                             characteristics such as age and health that impact the cost of life
                             insurance.

                             In addition to similarities with respect to basic coverage, FEGLI and
                             private sector group plans generally offer some form of optional coverage
                             that shares some similarities as well. First, employees in both FEGLI and
                             private group plans typically must fund any optional coverage with no
                             employer contribution. In addition, both FEGLI and private sector
                             employers generally offer optional coverage in increments of one to five
                             times the employee’s annual salary. Finally, both FEGLI and private
                             sector plans generally offer life insurance coverage on the employee’s
                             dependants.


Unlike Private Group Life    Unlike most private sector group life insurance plans, FEGLI, according to
Plans, FEGLI Assumes         OPM officials, assumes most of the risk of loss associated with the
Most of the Insurance Risk   program. In the private sector, according to industry experts, employers
                             generally purchase group life insurance policies from insurers that then
                             bear the risk of loss. 22 That is, the insurer bears the risk that the claims
                             associated with the policy may exceed the premiums collected from the
                             policyholder. In contrast, according to OPM officials, the FEGLI program
                             effectively bears all such risk based on the expectation that the FEGLI
                             Fund is sufficient to cover claims made by FEGLI beneficiaries.



                             21
                               According to OPM, for FEGLI, employees enrolling as new hires or during an open
                             season do not need to provide information on their medical condition or history.
                             22
                               Some large private sector employers may share in the risk of loss through certain
                             arrangements with an insurer, such as receiving back from the insurer a portion of
                             premiums paid in excess of claims or paying additional premiums if claims exceed a
                             specified amount.




                             Page 11                                                                 GAO-12-94 FEGLI
                             FEGLI’s creation contemplated the federal government purchasing group
                             life insurance from a private sector group life insurer or insurers and
                             mitigating the risk of loss by purchasing reinsurance for those insurers.
                             However, as the FEGLI Fund balance has grown over time, OPM officials
                             noted, the need for an insurer and reinsurers to assume the program’s
                             risk of loss has diminished. 23 For example, according to OPM and MetLife
                             officials, even though OPM has a policy with MetLife to provide FEGLI life
                             insurance and makes funds available to MetLife for this policy, when
                             FEGLI beneficiaries submit claims, MetLife draws upon OPM’s FEGLI
                             Fund to make claims payments. In addition, according to the same
                             officials, MetLife’s exposure to loss is currently limited to its role as a
                             reinsurer for the FEGLI program, as it covers approximately 85 percent of
                             the FEGLI program’s reinsurance. However, this exposure would only
                             result in payment after the depletion of the entire FEGLI Fund, which has
                             a balance as of September 30, 2010, of $37.6 billion, or approximately 14
                             times the amount of FEGLI’s annual claims payments. OPM and MetLife
                             both consider the possibility of exhausting the FEGLI Fund to be so
                             remote that the cost of the reinsurance is negligible. While the program
                             initially had about 160 reinsurers, only 10 were participating in 2011, with
                             MetLife providing about 85 percent of the program’s reinsurance. OPM
                             pays each of the 10 reinsurers approximately $500 annually for their
                             participation in the program, and FEGLI has never had to use this
                             reinsurance coverage.


Certain FEGLI Features       Compared with private sector group term life plans, FEGLI has certain
and Benefits Can Result in   features and benefits that can make premiums for all coverage higher for
Higher Costs for             federal employees. First, FEGLI’s statute requires enrolled federal
                             employees to pay two-thirds of the premium rate for their Basic life
Employees Compared with      insurance coverage, while employers in the private sector generally cover
Private Sector Group Term    the full cost of their employees’ basic coverage. 24 According to insurance
Insurance                    industry officials, the amount of basic coverage that private group plans



                             23
                               A policy contract between OPM and MetLife established MetLife as FEGLI’s insurer. In
                             addition to FEGLI’s insurer, the program also has additional insurance companies that
                             provide reinsurance. According to the ACLI, reinsurance involves the transfer of some or
                             all risk to another insurer. The company transferring the risk is called the “ceding
                             company” and the company receiving the risk is called the “life assuming company” or
                             “reinsurer.”
                             24
                              For employees of the U.S. Postal Service, Basic life insurance for enrollees under
                             FEGLI is free, as the U.S. Postal Service pays for 100 percent of this cost.




                             Page 12                                                                 GAO-12-94 FEGLI
generally provide can be a flat amount or equal to an employee’s annual
salary or more. Whether an employee receives more employer-paid
coverage through a private plan that pays the entire premium for some
amount of coverage than through FEGLI would depend on the amount of
no-cost coverage the private sector employer provides. 25

Second, according to OPM officials, FEGLI offers federal employees a
retirement life insurance benefit that is financed, in part, by a portion of the
premiums charged while employees are working. FEGLI’s retirement
benefit raises FEGLI premiums above those of most private sector group
plans, which generally do not offer such a benefit. As we have seen, FEGLI
offers a postretirement benefit for both Basic and Optional coverage.
According to OPM officials, federal employees who participate in FEGLI
begin prefunding, or paying in advance for, Basic retirement coverage as
soon as they begin their FEGLI coverage. Prefunding for Basic coverage is
necessary because newly retired employees over age 65 who choose a 75
percent reduction in this coverage are no longer required to pay premiums
for the coverage they are receiving. With Optional coverage, except for
Option A, employees begin prefunding the cost of their retirement benefits
when they reach age 55 and continue to do so until they retire. Newly
retired employees who choose a 75 percent reduction in their Option A
coverage, and a 100 percent reduction in Options B and C, coverage no
longer pay premiums for the Optional coverage they are receiving. In
addition, life insurance coverage for people of retirement age or older can
be expensive. According to private sector insurance industry participants
we spoke with, the cost of postretirement benefits is quite high because as
employees age, the likelihood of the insurer being required to pay a claim
also increases. As a result, few private sector plans offer such benefits.
While OPM has stated that having flexible benefits, including life insurance
coverage in retirement, contributes to employee retention, insurance
industry participants with whom we spoke said that they have not seen any
evidence that postretirement coverage attracted or retained employees.

In addition, for certain individuals, FEGLI Basic coverage may appear more
costly than private sector basic life insurance. First, FEGLI features level



25
  For example, a private employer may offer $50,000 in basic life insurance coverage
without any premiums for employees. FEGLI may offer $100,000 in Basic coverage, but
federal employees must pay two-thirds of the premium. So in essence, FEGLI employees
who are over age 45 and not receiving the program’s extra benefit coverage are getting
one-third, or approximately $33,300 in employer-paid coverage.




Page 13                                                               GAO-12-94 FEGLI
                          premiums that may not be a part of some private individual policies. With
                          such a feature, monthly premiums remain the same over time instead of
                          increasing with age. Compared to a policy without such a feature, level
                          premiums are higher earlier in life and then become lower at a certain
                          point. If relatively younger federal employees compare FEGLI to private
                          individual coverage without level premiums, FEGLI coverage may appear
                          to be more costly, depending on their age. Second, because FEGLI is a
                          group life program, all individuals pay the same premiums regardless of
                          their health status, unlike individual coverage where premiums generally
                          depend on the health of the person being insured. As a result, if relatively
                          healthier federal employees compare FEGLI to private individual coverage,
                          FEGLI coverage could also appear more costly. Finally, FEGLI’s
                          postretirement coverage, which increases FEGLI premiums but is not
                          generally part of private plans, also contributes to FEGLI’s cost relative to
                          private sector alternatives that do not feature this coverage. The possibility
                          that FEGLI coverage may appear more costly than private sector
                          alternatives to relatively younger or healthier federal employees is mitigated
                          to some extent by the extra amount of coverage FEGLI provides federal
                          employees under age 45. However, in cases where FEGLI’s premiums
                          exceed those for similar coverage in the private sector, federal employees
                          may conclude that FEGLI is more expensive and choose to opt out of the
                          program.


Although FEGLI’s          While FEGLI disclosures cover many key aspects of the program, they do
Disclosures Cover Key     not cover certain program features that could affect an employee’s
Aspects of the Program,   decision to purchase FEGLI coverage. Consistent with OPM’s strategic
                          goal of helping ensure that federal employees fully understand their
They Do Not Cover Some    benefits, and with the National Association of Insurance Commissioners’
Important Features        (NAIC) guidance on informative marketing materials, OPM provides a
                          significant amount of information on FEGLI through a handbook, program
                          booklet (a condensed version of the handbook for employees), and
                          website. These disclosures provide information on a range of topics,
                          including enrollment, coverage options and costs, designation of
                          beneficiaries, claims and claims payments, and resources for employees
                          if they have questions or issues. OPM provides this information in hard
                          copy and through the FEGLI website, which also includes a calculator
                          that allows users to determine premiums for various combinations of life
                          insurance coverage. Providing timely and informative FEGLI guidance
                          materials to federal agency human resources staff is another means
                          through which OPM seeks to ensure that federal employees understand
                          their benefits.



                          Page 14                                                        GAO-12-94 FEGLI
While these disclosures are useful, they do not make employees aware of
some FEGLI benefits and features that could affect their decision to
participate in the program.

    The disclosures do not inform employees that premiums for Basic
     coverage include a postretirement benefit and that employees prefund
     this benefit. 26 Employees who are unaware of this prefunding element
     could decide that FEGLI coverage is too expensive, decline
     participation in the program, and not receive FEGLI’s potentially
     valuable insurance benefits. Conversely, employees that plan to work
     in the federal government for only a short period, or at least not through
     retirement, could decide to participate in the program, not knowing that
     they would be paying for a benefit they would never receive.

    FEGLI disclosures, while showing a constant premium rate, do not
     make employees aware of the level-premium feature of the program’s
     Basic coverage that spreads premiums equally over the duration of
     the policy rather than charging less during early policy years and more
     in later policy years. Employees unaware of this feature could
     conclude that FEGLI coverage is more expensive than alternative
     private sector coverage, particularly in the earlier years of the policy,
     and decide to opt out, foregoing potentially valuable life insurance
     coverage.

    The disclosures also do not convey to federal employees that, for
     Basic coverage, FEGLI charges a composite premium that averages
     the cost of insurance for all participants regardless of age or health.
     That is, participants pay the same regardless of whether they pose a
     lesser or greater risk of loss. This averaging can be of great benefit to
     some, especially those who may not be able to obtain coverage
     elsewhere. However, as with the level-premium feature, those not
     aware of this feature could conclude that FEGLI coverage is simply
     more expensive than alternative private sector coverage and forego
     coverage they might not be able to obtain elsewhere.




26
  FEGLI disclosures characterize retirement coverage as “free” when certain reduction
options are selected after age 65.




Page 15                                                                GAO-12-94 FEGLI
In Overseeing FEGLI,
Processes for Setting
Premium Rates Could
Be Improved

OPM Performs Many of        According to OPM officials, OPM performs many FEGLI administrative
FEGLI’s Administrative      and operational functions, including collecting premiums, overseeing
and Operational Functions   FEGLI’s claims settlement process (which MetLife administers), and
                            publishing FEGLI’s regulations and disclosures. The same officials said
and Works Closely with      that FEGLI premiums are collected by withholding premiums from
MetLife                     enrollees’ paychecks, annuities, or compensation and collecting agency
                            contributions from employing agencies or retirement systems, as
                            applicable, for deposit by OPM into the FEGLI Fund. On a monthly basis,
                            premiums are moved from the FEGLI Fund which is held by the Treasury
                            Department, into a letter of credit account, which is administered by a
                            Federal Reserve Bank and from which MetLife can draw down funds to
                            pay claims. MetLife’s OFEGLI, which is responsible for paying claims to
                            beneficiaries, draws money from the FEGLI Fund on a monthly basis
                            using the line of credit and transfers claims payments to beneficiaries. In
                            addition to its premium collection function, OPM officials said OPM is also
                            responsible for investing FEGLI Fund assets in government securities
                            and ensuring that investment income on program assets is taken into
                            account when determining program costs. Funds that flow through
                            FEGLI, according to these officials, ultimately begin with employee and
                            agency premiums and end with a payout to beneficiaries in the form of a
                            check or an RAA. Figure 2 illustrates the flow of FEGLI funds between
                            those endpoints, including being held in the FEGLI Fund.




                            Page 16                                                     GAO-12-94 FEGLI
Figure 2: FEGLI Funds and Operations




                   Premiums for
 Federal agency    Basic coverage         Employees’ Life
                                          Insurance Fund
                                                                                                         Lump-sum check                   Employee’s
                                        Administered by OPM                      MetLife-OFEGLI
                                                                                                                                          beneficiary
                                         and held at the U.S.
                   Premiums for               Treasury                                                         RAA
                   Basic and Optional                                                      RAA is                                  RAA withdrawal
                   coverage                                                                established       MetLife               and interest
    Federal
   employee                                                                                              general accounta
                                                          Investment
                                                          income
                                                                                                                      Investment
                                            Investments                                                               income
                                           (U.S. Treasury
                                             securities)                                                    Investments



                                                  Sources: OPM; Art Explosion.
                                              a
                                              MetLife’s general account and the investment income it earns are used to meet beneficiaries’ RAA
                                              withdrawals and the interest MetLife guarantees beneficiaries on their RAA accounts.


                                              In addition to managing FEGLI resources, OPM officials said they monitor
                                              and oversee MetLife’s claims settlement processes by receiving and
                                              reviewing weekly reports on claims activity. In addition to managing
                                              processes for dispersing FEGLI funds, OPM officials said they receive
                                              annual financial reports on claims and administrative costs that are used
                                              to determine the timeliness of payments and, as noted earlier, help
                                              predict future claims and other expenses. 27

                                              In addition to producing and updating FEGLI’s Handbook, Program
                                              Booklet, website and forms, OPM officials said that OPM also issues
                                              FEGLI regulations, including the Life Insurance Federal Acquisition




                                              27
                                                In addition to financial management and oversight by OPM’s actuarial and financial staff,
                                              OPM’s Inspector General audits the FEGLI program every 2 years. MetLife’s auditors also
                                              audit administrative and other expenses charged to the FEGLI program.




                                              Page 17                                                                                    GAO-12-94 FEGLI
Regulation (LIFAR), that guide the program’s operations. 28 The
regulations, for example, outline the types of Basic and Optional
insurance available through FEGLI, the amounts of FEGLI coverage that
the program offers, eligibility requirements, program costs, and
beneficiary designation. Additionally, the LIFAR describes the terms of
the contractual arrangement between OPM and MetLife under the FEGLI
program, including MetLife’s receipt and administration of claims and the
calculation of administrative costs and profit levels. The LIFAR also
provides guidance on contract oversight, including requiring policies and
procedures to help ensure that FEGLI services conform to the contract’s
quality requirements, and an OPM evaluation of MetLife’s system of
internal controls. Additionally, the LIFAR requires that MetLife develop a
quality assurance program that includes procedures to address (1)
timeliness of claims payments to beneficiaries, (2) quality of services and
responsiveness to beneficiaries and OPM, and (3) detection and recovery
of fraudulent claims, among other things. Although FEGLI’s statute
exempts the program from contractual competitive bidding, the LIFAR
also provides direction on contract modifications and circumstances that
would allow for contract termination. According to OPM officials, they fulfill
these requirements by monitoring consumer feedback, tracking the
timeliness of claims payments, and reviewing external audits of MetLife,
which include OFEGLI. These officials said that they have not received
any indication of problems with timeliness or responsiveness, or
indications of any other deficiencies.

Although OPM has numerous administrative and oversight responsibilities
for FEGLI, MetLife, according to its officials, has a central role in several
key FEGLI financial and claims administration functions. First, officials
said that MetLife works with OPM on an annual basis to develop a
monthly premium amount. This premium is the amount made available to
MetLife to pay claims, MetLife’s administrative expenses, and MetLife’s
service charge. MetLife annually conducts a review of claims paid and
recommends a premium amount to OPM based on the projected level of
claims and expenses for the upcoming fiscal year. Officials noted that



28
  The purpose of the LIFAR is to implement and supplement the Federal Acquisition
Regulation specifically for acquiring and administering a contract, or contracts, for life
insurance under FEGLI. 48 C.F.R. § 2101.101(b). The part of the Federal Acquisition
Regulation that specifies contractual competition requirements does not apply to FEGLI
because the statute that created FEGLI, 5 U.S.C Chapter 87, exempts the FEGLI program
from competitive bidding.




Page 18                                                                 GAO-12-94 FEGLI
                           OPM and MetLife then agree on a total annual premium level for FEGLI,
                           which OPM then uses to determine rates for employees and federal
                           agencies. Second, OPM officials said that MetLife plays a key role in
                           receiving life insurance claims from FEGLI beneficiaries, processing
                           these claims, and ensuring that beneficiaries receive their life insurance
                           settlements. On a daily basis, MetLife officials said that they determine
                           how much they need to withdraw from the letter of credit account to meet
                           expenses associated with beneficiaries’ use of their RAAs.

                           In addition, OPM officials said MetLife prepares weekly and annual
                           financial reports on its FEGLI claims that provide important information on
                           the flow of funds from the FEGLI Fund to MetLife and from MetLife to
                           beneficiaries. OPM reimburses MetLife for its administrative expenses for
                           FEGLI, including its claims and financial functions. OPM officials said that
                           most of these expenses are the result of MetLife’s OFEGLI, through
                           which MetLife processes and pays claims. In 1997, according to MetLife
                           officials, OPM and MetLife entered into an agreement that capped
                           MetLife’s direct administrative expenses for FEGLI at $6.1 million and
                           indirect expenses at 20 percent of that ceiling. This ceiling is adjusted
                           annually by the Urban Consumer Price Index. In addition to administrative
                           expenses, officials said that MetLife receives a service charge for
                           adjudicating and administering FEGLI claims. This service charge is
                           calculated using the profit analysis factors found in the LIFAR. For fiscal
                           year 2011, according to OPM officials, MetLife’s service charge was
                           $965,000. 29


Under OPM’s                Under OPM’s administration of the FEGLI program, according to OPM
Administration, FEGLI      officials, program funds have been sufficient to pay life insurance claims
Funding Has Been           and meet program liabilities. According to OPM officials, one of their key
                           responsibilities is to determine FEGLI’s liability for current and future life
Sufficient to Pay Claims   insurance coverage and to take steps to ensure that sufficient assets are
and Meet Program           available to meet these potential liabilities. Various factors affect how
Liabilities                these liabilities are calculated, including changes in the mortality of
                           federal employees, federal salaries, and interest rates. OPM actuaries
                           said that they use these factors as part of an actuarial valuation model to


                           29
                             According to the LIFAR, OPM applies a weighted guidelines method to determine the
                           service charge for FEGLI. The profit analysis factors include contractor performance,
                           contract cost risk, federal socioeconomic programs, capital investments, cost control,
                           independent development, and transitional services.




                           Page 19                                                                 GAO-12-94 FEGLI
make annual estimates of FEGLI’s current and future liabilities. The
actuaries then estimate the funds needed from premiums to cover these
liabilities and program expenses, taking into account interest on retained
funds and the FEGLI Fund balance. In addition, according to OPM
officials, OPM actuaries monitor and annually review the claims
experience for each FEGLI insurance coverage option, by age group and
gender, and make recommendations to OPM senior management on the
premium rates employees and their agencies should pay.

According to OPM officials, the FEGLI program is adequately funded if
FEGLI revenues meet or slightly exceed program costs and the
program’s assets meet or exceed its liabilities. Figure 3 shows OPM data
on FEGLI’s assets and liabilities from 2000 to 2010, and appendix II
provides additional information on FEGLI’s annual premiums, claims, and
investment income. In particular, OPM reported in its 2010 annual report
that the program’s liabilities as of September 30, 2010, were
approximately $43.9 billion and that its assets totaled $39.2 billion. 30
According to OPM officials, while the reported data would appear to
indicate that the program was underfunded, they believe FEGLI’s
financing is adequate because the overall liability amount reported above
does not take into account employee contributions for optional insurance
coverage, which has the effect of making the liability appear to be larger
than it actually is. 31 According to OPM, they take these funds into account
in other internal analyses, and these analyses show that the program’s




30
   In past reports we have noted the importance of federal agencies determining the
liability created by their insurance programs and ensuring the availability of funds to meet
those liabilities. See GAO, Federal Emergency Management Agency: Action Needed to
Improve Administration of the National Flood Insurance Program, GAO-11-297
(Washington, D.C.: June 9, 2011) and Budget Issues: Budgeting for Federal Insurance
Programs, GAO/AIMD-97-16 (Washington, D.C.: Sept. 30, 1997).
31
  According to OPM officials, they calculate FEGLI’s actuarial liability using methods that
are consistent with guidance established by the Federal Accounting Standards Accounting
Board’s Statement of Federal Financial Accounting Standards (SFFAS) 5: Accounting for
Liabilities of the Federal Government. They also use SFFAS 33: Pensions, Other
Retirement Benefits, and Other Post-Employment Benefits: Reporting Gains and Losses
from Changes In Assumptions and Selecting Discount Rates and Valuation Dates. When
they perform FEGLI’s liability calculations following these standards, FEGLI’s total liability
exceeds program assets. However, FEGLI’s total liability does not account for employee
contributions for Optional coverage.




Page 20                                                                     GAO-12-94 FEGLI
                                            assets sufficiently meet the program’s liability when employee
                                            contributions are considered. 32

Figure 3: FEGLI Assets and Liabilities, 2000-2010

Nominal dollars in billions
50

                                                                                                                                             Liabilities

40                                                                                                                                           Assets



30




20




10




 0
     2000            2001     2002   2003           2004             2005             2006             2007             2008   2009       2010
     Calendar year
                                            Source: OPM Agency Financial Reports and Performance and Accountability Reports.




OPM’s Processes for                         The legislation that created FEGLI intended the program to offer a low-
Achieving the Goal of                       cost insurance benefit to federal employees and their families.
Providing a Low-Cost                        Specifically, the statute that created FEGLI described the program as an
                                            insurance benefit for federal employees that provides insurance at rates
Benefit to Federal                          OPM determines are generally consistent with the lowest basic premium
Employees Lacked Clarity                    rates for new policies issued to large employers. Further, FEGLI’s
                                            legislative history suggests that the program’s purpose is to provide low-
                                            cost group life insurance to federal employees. In addition, OPM’s most
                                            recent strategic plan calls for ensuring that available benefits, including
                                            life insurance benefits, align with employees’ needs.




                                            32
                                              OPM provided us with the results of these internal analyses. We did not verify them,
                                            both because of the potentially significant costs involved and because of the program’s
                                            history of meeting its claims payment responsibilities in every year of its operation.




                                            Page 21                                                                                   GAO-12-94 FEGLI
                           As we have seen, however, FEGLI has features—some required by
                           statute—that can make its coverage more expensive for federal
                           employees compared with the type of coverage generally offered by
                           private group life insurance programs. For example, as noted earlier,
                           FEGLI requires an employee contribution for Basic insurance, something
                           generally not required in private sector plans. In addition, the program
                           features a postretirement benefit that, although not generally found in
                           private sector plans, does increase the premiums that FEGLI participants
                           must pay. OPM officials told us that they periodically compare FEGLI to
                           other large group life insurance plans, primarily in terms of coverage
                           levels, and have concluded that the features and benefits FEGLI offered
                           are on par with those offered by private sector plans. In addition, OPM
                           officials noted that key FEGLI characteristics such as coverage levels, the
                           portion of the cost paid by federal employees, and the structure of Basic
                           premiums are determined by FEGLI’s statute, and as a result, changing
                           the program can involve statutory changes that require congressional
                           action. They further noted that because of the program’s size, the limited
                           number of OPM staff available to administer the program, the amount of
                           administrative work involved in making a change to the program, and the
                           potential need for the FEGLI statute to be changed, altering program
                           processes is not a simple task. OPM officials said that because of various
                           concerns, such as the length of time required for legislative changes,
                           inherent costs incurred with structural program modifications, and their
                           interest in preserving program continuity, requests for significant changes
                           are minimal and made only after careful consideration. However, OPM is
                           able to make changes to FEGLI premium rates paid by federal employees
                           and agencies, as well as other changes including options available to
                           beneficiaries for receiving claims payments. Nevertheless, OPM did not
                           appear to have a systematic or documented process, or requirements, for
                           comparing FEGLI with private sector plans. In addition, OPM did not have
                           a methodology or criteria with appropriate benchmarks or measures for
                           consistently comparing FEGLI benefits with those provided by the private
                           sector. The results of such analyses could be used, for example, to make
                           changes to the program within OPM’s authority or, potentially, suggest
                           legislative changes to Congress.


OPM Lacked Clear,          Since the last premium adjustment, OPM actuaries have recommended
Documented Processes for   changes—both increases and decreases—to FEGLI premium rates. As
Considering FEGLI          we have seen, each year OPM actuaries review and analyze FEGLI’s
                           assets and liabilities to determine the sufficiency of program assets to
Premium Rate Changes       cover life insurance benefit costs for all FEGLI enrollees. In addition, the
                           actuaries analyze the claims experience associated with each type of


                           Page 22                                                        GAO-12-94 FEGLI
coverage and age band and determine appropriate premium rates, which
may be higher or lower than the existing rates. OPM actuarial and
financial officials present the results of these analyses and any rate
change recommendations in an annual meeting with OPM management
that includes the FEGLI contracting officer, actuaries, financial staff, and
other OPM senior management. According to OPM officials, OPM senior
management then has the authority to decide whether to raise, lower, or
hold constant the rates that employees and agencies pay for FEGLI
insurance. However, according to OPM officials, OPM management
decided not to make these rate changes because they believed they
introduced more complexity for FEGLI participants and entailed
administrative changes that, at the time, were not practical given the
significant resources required. 33

Standards for internal control in the federal government state that policies
and procedures should exist for ensuring that findings from any audits or
reviews are promptly resolved and that all transactions and other
significant events are clearly documented. 34 OPM’s annual actuarial
reviews are effectively an internal control designed to help ensure the
accuracy and adequacy of premium rates. However, OPM does not
appear to have a documented process providing guidance on what to
include in the annual actuarial reviews and recommendations to
management. In addition, it does not have a process for documenting
management’s decisions with respect to those recommendations,
including any accompanying rationale. Management’s decisions on the
actuarial findings are significant events because of their potential effect
on the financial condition of the program and its ability to pay claims to
beneficiaries. Without documented processes for actuarial and financial
reviews and their disposition, OPM risks compromising the efficiency and
the effectiveness of these reviews and being unable to help ensure
premiums are consistent with program experience.




33
  The most recent changes to FEGLI premium rates took place in 2002 and were phased
in between 2003 and 2005.
34
  See GAO, Standards for Internal Control in the Federal Government, GAO/AIMD 00-
21.3.1 (Washington, D.C.: November 1999).




Page 23                                                             GAO-12-94 FEGLI
RAAs Are No Longer
the Default
Settlement Option,
but Better Disclosures
Are Needed

RAAs Were the Default      RAAs had been the default method used from 1994 until February 2011
Option from 1994 to 2011   for many FEGLI beneficiaries to receive their life insurance settlements.
                           RAAs became the default option in 1994 for payments over $7,500 after
                           MetLife requested that OPM allow RAAs to be used in addition to lump-
                           sum check payments. OPM granted the request under certain conditions,
                           including RAAs be provided as additional benefits to FEGLI beneficiaries
                           at no additional cost. OPM officials noted that the change to RAAs
                           reduced administrative costs, including for staff time and materials that
                           were associated with issuing lump-sum checks.

                           In February 2011, OPM changed the FEGLI life insurance settlement
                           process, requiring beneficiaries to choose between receiving a lump-sum
                           check or an RAA when receiving a settlement. Specifically, OPM revised
                           the form that FEGLI beneficiaries submit for a life insurance claim,
                           removing the default option and requiring beneficiaries to affirmatively
                           choose a lump-sum payment or an RAA for settlement amounts over
                           $5,000. 35 OPM officials said that they made this change after reviewing
                           RAA practices and procedures and published concerns about RAA
                           practices. Two major life insurers with whom we spoke said that making
                           the RAA payment method optional can have a considerable effect on
                           consumers. When consumers have the option to choose between RAAs
                           and lump-sum check payments, the overwhelming majority choose lump-
                           sum check payments.




                           35
                             As stated in OPM’s official death claim form from February 2011, if the proceeds exceed
                           $5,000 and no box is checked, beneficiaries will receive an RAA.




                           Page 24                                                                 GAO-12-94 FEGLI
Industry Views Vary on the   According to several insurance companies and OPM, RAAs can benefit
Benefits and Consumer        beneficiaries, but others expressed concerns about the extent of RAA
Protection Concerns from     disclosures and consumer protections. Industry participants cited
                             flexibility and a guaranteed interest rate as the primary benefits of RAAs.
RAAs                         For example, some said RAAs offer beneficiaries flexibility during a
                             difficult time and loss to determine how best to use or invest the life
                             insurance proceeds, which are often sizeable sums. While deciding how
                             to use the funds, beneficiaries with RAAs receive a guaranteed minimum
                             interest rate on their RAA account. According to MetLife officials, for
                             FEGLI, each beneficiary’s minimum interest rate is based on when the
                             RAA was opened and is guaranteed for as long as the beneficiary
                             maintains the RAA. According to the same officials, the guaranteed
                             interest rates are 3.0 percent for RAAs opened before April 2003, 1.5
                             percent for RAAs opened April 2003 to April 2009, and 0.5 percent for
                             RAAs opened after April 2009. The officials noted that even the most
                             recent interest rate paid on RAAs is competitive compared to what
                             beneficiaries could currently earn on similar alternative investments. For
                             example, as of September 26, 2011, the best available rates for a money
                             market account ranged from .10 percent to 1.10 percent. 36 In addition,
                             they said that RAAs provide beneficiaries the ability to access their funds
                             at any time, including the opportunity to withdraw either partial amounts or
                             the entire amount.

                             Despite these benefits, RAA disclosures in general do not convey some
                             important information to consumers, including information on options
                             beneficiaries have for receiving their life insurance settlement funds. For
                             example, the disclosures do not clearly indicate that OPM considers life
                             insurance claims to be closed, and its relationship with beneficiaries
                             ended—as it is with a lump-sum payment—once a beneficiary chooses
                             an RAA as a settlement option. In addition, beneficiaries may not
                             understand that RAAs involve a separate contract with MetLife that is not
                             part of the FEGLI program and is regulated by states rather than the
                             federal government. Regulatory officials we interviewed from one state
                             said that consumer choice and product understanding is critically
                             important to consumers and that that state’s law, in force since the mid-
                             1990s, requires companies to offer beneficiaries a choice of life insurance
                             settlement options at the time life insurance claims are submitted. The
                             same officials noted that RAAs cannot be the default life insurance



                             36
                              Money market account interest rate information is according to Bankrate.com.




                             Page 25                                                               GAO-12-94 FEGLI
settlement vehicle in their state. Three other states’ regulators were
concerned about how well beneficiaries understood RAAs and one of
these states had recently passed a bill that required RAA disclosures to
include information on settlement options available to beneficiaries.
Another part of the bill prevents insurance companies from offering RAAs
as their default settlement option. Regulatory officials from another of
these states said that their office had undertaken a regulatory review and
was developing guidance for insurance companies on using RAAs.

In addition to concerns about RAA disclosures, some industry participants
and a federal regulator expressed concern about the kinds of protections
that apply to RAAs and how well beneficiaries understand them. For
example, they indicated that while RAAs are not insured by the Federal
Deposit Insurance Corporation (FDIC), the use of drafts that closely
resemble checkbooks offered by banks could give the appearance that
FDIC insurance protects RAAs. 37 Others noted that whether state guaranty
funds were adequate to fully protect those with RAAs is unclear. Industry
officials we spoke with noted that state guaranty funds typically protect
RAAs up to a limit of $300,000, although in some states that limit may be
as high as $500,000. An insurance industry expert explained that
beneficiaries who have RAA assets that exceed state guaranty fund limits
may not be fully protected. According to OPM, approximately 25 percent of
federal employees covered by FEGLI have insurance in force of $300,000
or more. Other officials noted that state guaranty fund protections are not
the same as FDIC insurance. Each FDIC-insured account is protected;
therefore, consumers with multiple accounts can be protected above the
$250,000 FDIC limit in the aggregate. Conversely, state guaranty funds
limit an individual’s payout protection to the statutory ceiling so consumers
with multiple retained asset accounts are not protected beyond it.




37
   FDIC is an independent agency of the United States government that provides
protection against the loss of deposits if an FDIC-insured bank fails. FDIC insurance
covers all deposit accounts at insured banks, including checking accounts, Negotiable
Order of Withdrawal (NOW) accounts, savings accounts, money market deposit accounts,
and certificates of deposit (CDs). The FDIC does not insure money invested in stocks,
bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if
these products were purchased from an insured bank. FDIC insurance is backed by the
full faith and credit of the United States government. Since the FDIC’s creation in 1933, no
depositor has ever lost money on FDIC-insured deposits.




Page 26                                                                   GAO-12-94 FEGLI
Insurance Industry          In late 2010, NAIC and the National Conference of Insurance Legislators
Organizations Have Issued   (NCOIL) addressed concerns about RAAs by issuing guidance intended
Guidance to Improve RAA     to improve disclosures to consumers. In December 2010, NAIC issued a
                            model bulletin for use by state insurance regulators to establish standards
Regulation                  for disclosing information about the payment of life insurance benefits
                            with RAAs. 38 For example, under the bulletin, disclosures should clearly
                            state that choosing an RAA involves establishing a supplemental contract
                            with an insurance company that is distinct from the life insurance policy.
                            The bulletin also notes that the supplemental policy should also provide
                            clear disclosures of the rights of the beneficiaries and the obligations of
                            insurers. Other key provisions in the bulletin included making sure
                            disclosures explain

                               available settlement options for beneficiaries,

                               applicability of FDIC protections,

                               applicable RAA fees charged by insurers,

                               guaranteed interest rates associated with RAAs,

                               provision and use of draft books,

                               frequency of financial statements to beneficiaries, and

                               policies for inactive RAA accounts.

                            Around the same time, NCOIL released its Beneficiaries’ Bill of Rights, a
                            document which was intended to improve not only disclosures associated
                            with RAAs but also transparency and accountability. NCOIL’s new
                            standards echoed many of NAIC’s proposed improvements and also
                            included provisions that, if adopted, would require insurers to

                               refer beneficiaries to their state insurance departments if they had
                                further questions about RAAs,



                            38
                               According to NAIC, model bulletins are documents produced by NAIC that are generally
                            used by state insurance departments to notify companies and/or insurance producers on
                            how state insurance departments intend to interpret various issues or developments.
                            Bulletins do not generally carry the force of state law, though they may be used to notify
                            interested parties of adoptions or changes to existing state law.




                            Page 27                                                                  GAO-12-94 FEGLI
   immediately return to beneficiaries remaining RAA balances if
    accounts became inactive during a 4-year period,

   make clear that any violation of NCOIL’s Bill of Rights would
    constitute a violation of states’ unfair trade practices law,

   identify any financial institution or entity that administers RAAs on the
    insurer’s behalf, and

   report annually to state regulators on the number and dollar amount of
    RAAs held, RAA structure and investment earnings, interest rates
    paid to beneficiaries, and numbers and dollar amounts of RAAs that
    go through state unclaimed property processes.

Some states already have regulations in place that specifically address
RAAs and others have recently taken action to address concerns about
the accounts. For example, according to NAIC, as of August 2011, 26
states had RAA-related statutes that allowed insurance companies to
establish RAAs for beneficiaries and hold life insurance assets in these
accounts. In addition, according to NAIC, 22 states had RAA-specific
regulatory protections and disclosures, including many of the provisions
found in NAIC’s model bulletin. According to NAIC, many states either
enacted or updated RAA regulations since the beginning of 2010. Figure
4 provides information on how states have approached regulating RAAs.




Page 28                                                        GAO-12-94 FEGLI
Figure 4: State Regulation of RAAs, as of August 2011




                                                  States with RAA-related statutes

                                                  States with RAA regulations

                                                  States with RAA statutes and regulations

                                                  States with no RAA-related statutes or regulations

                                                  States that have enacted or updated RAA-related regulations since January 2010

                                         Source: NAIC (data); MapInfo (map).




Recently Improved FEGLI                  While OPM recently revised and improved the FEGLI RAA disclosures
RAA Disclosures Still Lack               beneficiaries receive, the disclosures still lack some important
Important Information                    information. In February 2011, OPM improved FEGLI disclosures,
                                         particularly the form that beneficiaries must use to file a claim. FEGLI
                                         disclosures now inform beneficiaries that they have settlement options
                                         and include language stating that beneficiaries have an important choice
                                         to make in choosing between a lump-sum check and an RAA and
                                         indicating their choice on their claims form. In particular, the new form



                                         Page 29                                                                                   GAO-12-94 FEGLI
explicitly states that MetLife offers a guaranteed minimum interest rate
that may be better or worse than the market’s prevailing interest rate and,
unlike in the previous version, clearly informs beneficiaries that MetLife
may profit from RAAs. OPM further improved disclosures by more clearly
explaining that beneficiaries can access the total amount of their funds at
any time with no cost and by improving the information on applicable
protections. For instance, the disclosures now explicitly state that RAAs
are not bank accounts and are not insured by FDIC or any other federal
agency. They also explain that MetLife guarantees all RAA accounts,
including interest earned, and that this guarantee is backed by state
insurance guaranty associations.

Despite OPM’s improved disclosures, they continue to lack some
important information. In addition to failing to mention the aforementioned
separate RAA contract between FEGLI beneficiaries and MetLife, OPM’s
revised disclosures

    do not tell beneficiaries how to identify and contact the proper state
     department of insurance regulation should they have any questions or
     concerns about their RAAs. FEGLI beneficiaries may not clearly
     understand that OPM oversees all aspects of FEGLI prior to
     settlement but that state regulators become responsible thereafter. In
     the event that beneficiaries have questions or face issues with an
     RAA, they may not know where to turn for regulatory assistance.
     Further, there may be differences of opinion among regulators about
     who is the responsible regulator, making such guidance even more
     important to beneficiaries

    do not provide information on how to identify the relevant state
     guaranty fund and its applicable limits, or where to find additional
     information on a particular state’s fund. 39 According to the National
     Organization of Life and Health Guarantee Associations, beneficiaries
     whose RAA accounts contain more than their state guarantees may
     be at risk of leaving some funds unprotected.




39
  FEGLI disclosures, however, now alert beneficiaries that RAAs, including interest, are
fully guaranteed by MetLife and that MetLife’s guarantee is further backed by state
insurance guaranty funds. In addition, the disclosures state that maximum limits on
guarantees that protect beneficiaries’ RAAs vary across states.




Page 30                                                                  GAO-12-94 FEGLI
It is important for beneficiaries to be able to identify the relevant state
insurance regulator and guaranty fund in case they have questions or
issues regarding their RAAs and associated guarantee fund protection.
However, identifying the appropriate regulator is challenging because
some regulators differed on what type of instruments RAAs are, as well
as who regulates them. For example, according to two state regulators
and NAIC officials, RAAs are supplemental insurance contracts between
beneficiaries and insurance companies. However, two other states’
regulators classified them as settlement options. Yet another state’s
regulator said that RAAs were both supplemental contracts and
settlement payouts of existing life insurance policies. States also differed
on the time frame for considering insurance contracts and settlements
settled. OPM officials said that FEGLI life insurance claims were satisfied
as soon as beneficiaries established RAAs, and two of the five state
regulators with whom we spoke shared that view. However, regulatory
officials we interviewed from one state said that the original insurance
contract was not satisfied until all funds were withdrawn from the RAA.
The state insurance regulators and some industry officials with whom we
spoke also differed on which state’s regulator oversees a particular RAA
account and, as a result, which state’s guaranty fund would apply. For
example, two states’ regulatory officials and NAIC representatives said
that the relevant regulator would be the one from the state where the
beneficiary resided. However, two other states’ officials said it would be
the state where the original group life insurance policy was issued, and
yet another state regulator as well as officials from the National
Organization of Life and Health Guaranty Associations said it would be
the state where the group life insurer was domiciled. A representative
from a life insurance industry association with whom we spoke said that
the appropriate regulator could be the one from the state where the
insurance contract was established, where the beneficiary resided, or
both.

Without clarity on which state insurance regulator has jurisdiction over an
RAA held by a FEGLI beneficiary, or which state guaranty fund might
apply, beneficiaries may not know where to turn to find answers to RAA-
related questions on the extent of protections applicable to their RAA. For
example, the underlying FEGLI policyholder (the federal government) is
located in Washington, D.C.; the RAA provider (MetLife) is domiciled in
New York; and federal employees and their beneficiaries can live
anywhere in the United States. Identifying which state has jurisdiction
over a MetLife RAA contract, and which state guaranty fund applies,
could be difficult, especially if the state regulators themselves might not
agree on the proper jurisdiction. And as we have seen, state guaranty


Page 31                                                       GAO-12-94 FEGLI
                            funds provide varying levels of protection. According to OPM officials,
                            determining the appropriate state regulator for RAAs is technically beyond
                            their purview because their involvement ends once the RAA is funded
                            with the FEGLI claim payment. However, OPM does work with MetLife to
                            create the disclosures that provide beneficiaries with information that
                            helps them determine whether or not they wish to select an RAA as their
                            settlement option. Information concerning the relevant state regulator and
                            guaranty fund would be important to have in deciding whether or not to
                            choose an RAA because it could determine the amount of protection
                            available to the beneficiary. In addition, it could also inform the beneficiary
                            of potential challenges in seeking regulatory assistance if, for example,
                            the beneficiary is located in one state but the relevant regulator is located
                            in a different state.


OPM Does Not Consider       In contrast to some private insurers with whom we spoke, OPM does not
the Investment Income       consider any of the income MetLife earns on FEGLI RAAs when
Earned on RAAs in Setting   determining premium rates for FEGLI coverage. Some insurance
                            company representatives we interviewed said that they considered all
Premium Levels              investment income, including income earned on RAAs, when determining
                            the premium rates for their life insurance policies, and that this income
                            typically had the effect of reducing the premiums insurers charge or
                            defraying other related costs. While officials from two companies with
                            whom we spoke said that they considered RAA earnings when pricing
                            their overall group life insurance plans, other insurers suggested that
                            investment income from their RAA accounts was too small to affect their
                            rate-setting calculations.

                            Because OPM contracts with MetLife for settlement services, RAAs
                            funded with FEGLI claims payments are established and operated by
                            MetLife. As a result, MetLife retains investment gains and losses earned
                            on these accounts, as do most private insurers. According to OPM
                            officials, because OPM considers a FEGLI claim to be fully paid when a
                            MetLife RAA is established, OPM has no connection to the RAA accounts
                            or any of their funds. In addition, OPM does not track any data related to
                            MetLife’s FEGLI-based RAAs. However, these RAAs are established with
                            FEGLI claims payments, and by not considering the income earned on
                            the accounts by MetLife, OPM may be missing an opportunity to offset
                            program expenses and potentially reduce premium rates.

                            While MetLife officials said that they could not specifically determine the
                            amount of investment gains and losses on FEGLI-funded RAAs, they did
                            say that as of December 31, 2010, RAAs maintained for FEGLI


                            Page 32                                                        GAO-12-94 FEGLI
              beneficiaries totaled approximately $3.5 billion. According to MetLife’s
              2010 annual financial statements, the company had a total of
              approximately $12 billion in FEGLI and non-FEGLI RAA accounts at year
              end and had earned approximately $267 million in net investment income
              on those accounts. The same officials also said that the company must
              meet costs and expenses associated with these RAAs, including the
              payment of guaranteed interest rates to FEGLI beneficiaries, and that by
              guaranteeing the minimum rates previously noted, MetLife has assumed
              financial risk. The same officials noted that these guaranteed rates are
              higher than most rates of return beneficiaries could currently receive
              through a bank or other liquid investment vehicle. In addition, MetLife
              would pay and has paid interest at a higher rate than the guaranteed
              minimum rates in more favorable interest rate environments, and
              according to officials, approximately 40 percent of FEGLI RAAs have
              been open for 5 or more years. This higher retention percentage, they
              said, may be partially due to advantageous rates MetLife is paying those
              beneficiaries. In contrast, several other life insurers with whom we spoke
              said that RAAs are often a short-term option for beneficiaries, and that
              beneficiaries typically close their RAAs within 1 to 2 years.


              Because life insurance is an important purchase for those seeking to
Conclusions   protect their dependents, prospective buyers need to fully understand the
              details of the policy they are considering. Although OPM provides
              significant information on its life insurance program, some information that
              could influence federal employees’ decision to buy FEGLI coverage is
              lacking. First, although FEGLI offers federal employees postretirement
              coverage, a benefit not commonly found in private sector group plans,
              FEGLI disclosures do not explain the effect of this benefit on premium
              levels, particularly the fact that federal employees begin prepaying for this
              coverage as part of their Basic insurance when they begin their
              employment. As a result, employees may be unaware that their premiums
              may be higher than those of group plans that do not offer such coverage.
              Second, the disclosures do not discuss FEGLI’s level-premium and
              composite rate structure for Basic coverage. Because these features can
              make FEGLI premiums look more expensive than private individual
              coverage without them, especially to younger and healthier individuals,
              some employees might conclude that FEGLI coverage is not a beneficial
              choice and pass up a potentially valuable benefit. Conversely, someone
              planning to work for the federal government for a short period of time
              might purchase FEGLI coverage without realizing that the coverage
              includes a retirement benefit they may not receive and will likely cost
              more than a group policy without such a benefit.


              Page 33                                                       GAO-12-94 FEGLI
Since FEGLI’s inception, OPM has sought to provide life insurance
benefits that meet federal employees’ needs at reasonable costs. While
OPM has conducted some periodic comparisons of FEGLI benefits and
premiums with those found in other group life plans, without formal,
documented processes for these comparisons, OPM risks that FEGLI
may not meet employees’ needs, that its premiums may exceed prices
charged for similar benefits in the private sector, or even that it may be
offering features that it does not need to offer to be competitive with
private sector group plans. For example, many private sector employers
no longer offer postretirement benefits in their group life plans because of
the cost. To help ensure that FEGLI premium rates are appropriate, OPM
officials said that OPM actuaries annually review and assess FEGLI’s
claims experience across different plans and age groups, recommending
rate changes when they believe such changes are necessary. However,
OPM lacks documented processes for making such recommendations
and documenting management’s disposition of any rate change
recommendations. Without a clear and consistent process for making,
reviewing, and implementing rate change recommendations, OPM risks
that needed changes may not be made and that the premiums charged to
federal employees may not reflect the coverage they are receiving.

FEGLI now offers two settlement options—a lump-sum check payment or
an RAA—and it is important for beneficiaries to be able to choose the
option that best meets their needs and to know where to turn to resolve
any issues they might have. While RAAs may offer benefits that some
beneficiaries appreciate, such as certain flexibilities and a guaranteed
interest rate, they also have certain characteristics that need to be fully
disclosed. OPM has recently revised its disclosures to beneficiaries to
provide more information on RAAs, but the disclosures still do not contain
some important information. For instance, they do not explicitly state that
RAAs involve a new contract between beneficiaries and MetLife that is
regulated by states rather than the federal government and that involves
state-based protections with certain limitations. As a result, FEGLI
beneficiaries may be unaware that new contractual terms and conditions
govern their RAAs. They also may not fully understand how their RAAs
are protected and what the limitations of that protection might be. Finally,
the disclosures do not provide the information that beneficiaries need to
find the proper regulator should they have questions about their
accounts—a problem that is complicated by the fact that the regulators
themselves may disagree over which one has jurisdiction.




Page 34                                                      GAO-12-94 FEGLI
                      To help better ensure that federal employees have all the information they
Recommendations for   need when deciding whether to purchase life insurance through FEGLI,
Executive Action      we recommend that the Director of the Office Personnel Management
                      take steps to ensure that FEGLI disclosures include complete and
                      accurate information on key benefits and features, including the
                      program’s postretirement coverage, composite rates, and level-premium
                      structure.

                      To help ensure that FEGLI provides relevant benefits that meet the needs
                      of federal employees at a reasonable and appropriate cost, we
                      recommend that the Director of the Office of Personnel Management
                      develop and implement a more structured process for comparing FEGLI
                      with private sector group life insurance plans and for documenting OPM
                      actuaries’ rate recommendations and any management decisions
                      concerning those recommendations.

                      To help ensure that FEGLI beneficiaries are provided with information on
                      all relevant aspects of selecting an RAA as a FEGLI settlement option, we
                      recommend that the Director of the Office of Personnel Management
                      include more complete information on financial protections and regulatory
                      oversight in program disclosures, working as necessary with MetLife and
                      NAIC to determine the appropriate state regulator for beneficiaries and
                      their RAAs.


                      On October 7, 2011, we provided a draft of the report to OPM for
Agency Comments       comment. On October 28, 2011, OPM provided written comments, which
and Our Evaluation    are reproduced in full in appendix III. OPM concurred with the
                      recommendations in the report and also provided technical comments,
                      which we incorporated as appropriate.

                      OPM concurred with our first recommendation that it take steps to ensure
                      FEGLI disclosures include complete and accurate information on FEGLI’s
                      key benefits and features, including postretirement coverage, composite
                      rates, and level-premium structure. Specifically, OPM stated that it strives
                      for FEGLI transparency and will take steps to provide more information on
                      key FEGLI features to ensure federal employees have the information
                      they need to make an informed benefit decision.

                      OPM also concurred with our second recommendation that OPM develop
                      and implement a more structured process for comparing FEGLI with
                      private sector group life insurance plans and for documenting OPM
                      actuaries’ rate recommendations and any management decisions


                      Page 35                                                      GAO-12-94 FEGLI
concerning those recommendations. Specifically, OPM stated that it
believes that benchmarking federal benefits programs, including FEGLI,
with other employer-provided benefits is essential to ensuring that the
federal government can recruit, retain, and honor a world-class workforce.

Finally, OPM concurred with our third recommendation that OPM include
more complete information on financial protections and regulatory
oversight, working as necessary with MetLife and NAIC to determine the
appropriate state regulator for beneficiaries and their RAAs. Specifically,
OPM stated that it has updated the FEGLI claims form and website to
provide more information about the choice for FEGLI beneficiaries to
receive a lump-sum check or RAA and will ensure that the best
information is available to assist beneficiaries in their decision-making
process.


As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies of this report to appropriate
congressional committees, the Director of the U.S. Office of Personnel
Management, and the Chief Executive Officer of the National Association
of Insurance Commissioners. In addition, the report will be available at no
charge on GAO’s website at http://www.gao.gov.

If you or your staffs have any questions regarding this report, please
contact me at (202) 512-7022 or cackleya@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff that made major contributions to
this report are listed in appendix IV.




Alicia Puente Cackley
Director, Financial Markets and
   Community Investment




Page 36                                                      GAO-12-94 FEGLI
             Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


             To describe and evaluate the Federal Employees’ Group Life Insurance
             (FEGLI) program’s key operational and financial components, we
             examined FEGLI’s authorizing statute and associated regulations,
             including the Life Insurance Federal Acquisition Regulation (LIFAR). In
             addition, we reviewed the program’s key policy documents, including the
             FEGLI Handbook, FEGLI Program Booklet for Federal Employees, FEGLI
             website, and the contract between the Office of Personnel Management
             (OPM) and the Metropolitan Life Insurance Company (MetLife). We
             focused on how FEGLI provides life insurance coverage to federal
             employees and their families and the cost of that insurance to federal
             employees and their respective agencies. Interviews with OPM and
             MetLife officials provided additional information on FEGLI operations,
             including the program’s coverage options; how the government, MetLife,
             and reinsurers bear insurance risk; and how the Employees’ Life
             Insurance Fund—FEGLI’s main financial fund—is used for paying life
             insurance claims and other program costs. We reviewed data from OPM
             annual financial reports and performance and accountability reports from
             2000 to 2010 to analyze FEGLI’s assets and liabilities. In addition, we
             reviewed information in the U.S. Budget on FEGLI from fiscal years 2002
             to 2012 to analyze FEGLI premiums, claims payments, and investment
             income. We also reviewed MetLife financial statements to determine the
             total dollar amount of MetLife’s retained asset accounts (RAA) and the
             total investment income MetLife derives from its RAA investments.
             Because these are audited documents and financial statements, with
             unqualified audit opinions, we found data from these documents and
             summary statistics from OPM and MetLife to be reliable for the purposes
             of this report. In addition, to determine how FEGLI’s structure and
             operations compare to large private sector group life insurance plans, we
             compared FEGLI to plans offered by six large private sector group life
             insurers. Our comparison focused on insurance coverage options,
             processes for determining premiums, available settlement options, and
             methods for establishing capital or surplus levels. We selected these
             insurers based on various insurer characteristics including their group life
             insurance market share, number of group life policies and certificates
             issued, and whether or not they provided group life insurance to federal
             employees. We also interviewed officials from the National Association of
             Insurance Commissioners (NAIC) and the American Council of Life
             Insurers (ACLI) to gain their perspective on group life insurance plans,
             finances, and operations. For additional information on how private sector
             group life plans are structured and the insurance they offer, we met with
             insurance regulators and benefits administrators from the states of
             California, Florida, New York, North Carolina, and Maryland. We selected
             this sample of states because it is geographically diverse, includes states


             Page 37                                                      GAO-12-94 FEGLI
Appendix I: Scope and Methodology




of domicile for several large insurance companies that sell a significant
number of the industry’s group life insurance policies, has a large number
of federal employees, and contains some states that have RAA
regulations and others that do not. In addition, we met with
representatives from two private companies with experience in insurance
brokerage, and human capital and benefits consulting.

To describe and evaluate OPM’s oversight of the FEGLI program, we (1)
reviewed FEGLI’s authorizing statute and regulations, including the
LIFAR, (2) reviewed OPM’s program monitoring, reporting, and other
oversight activities, (3) interviewed OPM and MetLife officials, and (4) met
with industry association representatives. We focused on the steps OPM
takes to periodically monitor and review FEGLI’s financial condition, and
on OPM processes for overseeing MetLife functions for receiving,
adjudicating, and paying claims to FEGLI beneficiaries. In addition, to
identify possible regulatory and consumer protection issues with group life
insurance plans and settlement vehicles, we met with representatives
from NAIC, ACLI, and a consumer advocate from the Center for
Economic Justice. To determine how states generally regulate group life
insurance plans, we met with insurance regulators from the five states
described earlier and compared FEGLI oversight with state regulation of
private group life insurers and identified similarities and differences.

To describe and evaluate the role of RAAs in FEGLI’s settlement process,
we examined key OPM disclosures, including the FEGLI Handbook,
FEGLI Program Booklet for Federal Employees, FEGLI website, and
Strategic Plan, 2010-2015, and we interviewed OPM officials. To
understand the kinds of information beneficiaries receive on life insurance
settlement processes, we also reviewed MetLife’s Welcome Kit for RAAs
and interviewed MetLife officials. We focused on (1) what RAAs are, how
they function, and how they are funded, (2) the kinds of RAA disclosures
OPM and MetLife provide and how clearly they help beneficiaries
understand their use, and (3) what RAA protections apply to FEGLI
beneficiaries. In addition, we examined how RAAs are regulated by
focusing on the activities and processes OPM and state regulators use to
oversee these accounts. With respect to state RAA oversight and to
determine what kinds of regulatory and consumer protection requirements
states have for insurance companies that offer RAAs, we chose a small
number of states as described earlier, some of which have RAA-specific
regulation, and others that do not. In addition, we compared FEGLI’s use
of RAAs to their use in the private sector and looked for any similarities,
differences, and emerging issues. We also looked to the insurance
industry for any applicable best practices with respect to RAAs that might


Page 38                                                      GAO-12-94 FEGLI
Appendix I: Scope and Methodology




be used to improve the FEGLI program. To better understand protections
associated with RAAs, we contacted officials from the Federal Deposit
Insurance Corporation, state regulators from our sample, and officials
from the National Organization of Health and Life Insurance Guaranty
Associations and the Center for Economic Justice. We also reviewed
information on RAA guidance from the National Conference of Insurance
Legislators.

We conducted this performance audit from September 2010 to November
2011 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




Page 39                                                    GAO-12-94 FEGLI
                                            Appendix II: Federal Employees’ Group Life
Appendix II: Federal Employees’ Group Life  Insurance Program Financial Information



Insurance Program Financial Information

                                            This appendix provides information on the dollar amount of premiums the
                                            FEGLI program has collected from enrolled federal employees and their
                                            respective agencies. It also shows the dollar amount of claims the
                                            program has paid to beneficiaries of federal employees. In addition, the
                                            figure shows the dollar amount of interest income derived from investing
                                            FEGLI Fund assets in U.S. Treasury securities. From 2000 to 2010, the
                                            dollar amount of premiums collected and claims paid has grown, while the
                                            dollar amount of interest income has declined slightly.

Figure 5: FEGLI Premiums, Claims Paid, and Interest Income, 2000-2010

Nominal dollars in billions
3.5
                                                                                                                                Premiums paid

3.0


2.5
                                                                                                                                Claims paid


2.0


1.5


1.0
                                                                                                                                Interest income
0.5


  0
      2000            2001    2002   2003            2004             2005             2006             2007   2008   2009        2010

      Calendar year
                                            Source: U.S. Budget Appendix for OPM, Fiscal Years 2002-2012.




                                            Page 40                                                                          GAO-12-94 FEGLI
              Appendix III: Comments from the Office of
Appendix III: Comments from the Office of
              Personnel Management



Personnel Management




              Page 41                                     GAO-12-94 FEGLI
Appendix III: Comments from the Office of
Personnel Management




Page 42                                     GAO-12-94 FEGLI
                  Appendix IV: GAO Contact and Staff
Appendix IV: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Alicia Puente Cackley (202 512-7022 or cackleya@gao.gov
GAO Contact
                  In addition to the contact named above, Patrick Ward (Assistant Director),
Staff             Joe Applebaum, Jan Bauer, Emily Chalmers, Marc Molino, Alan Rozzi,
Acknowledgments   Steve Ruszczyk, Mel Thomas, and Frank Todisco made key contributions
                  to this report.




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                  Page 43                                                     GAO-12-94 FEGLI
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